Peter Martin and Jason Dowling

A Coalition-commissioned inquiry has plumped for a big-brother style "eye in the sky" applying tax to kilometres travelled rather than on fuel.

Asked by Treasurer Joe Hockey to investigate impediments to infrastructure funding, the Productivity Commission has zeroed in on fuel excise, originally designed to fund roads but shrinking each year in real terms because of a decision by the Howard government to freeze rather than index the rate shortly after it introduced the goods and services tax.

The commission says at the moment the fuel excise and registration charges, drivers licence fees, stamp duty and tolls amount to $18 billion per year. GST on cars and fringe benefits tax would add about $1 billion more. Spending on roads amounts to $19.5 billion, and is growing faster than funding.

It wants the states and Commonwealth to trial an alternative to fuel excise known as "telematics" – the direct charging of all vehicles for road use, worked out from information collected by GPS and wireless-enabled devices reported to a central computer which bills the drivers.

The report says it would be important to ensure the measure couldn't be portrayed as a tax grab.

"It may be necessary for any reform to be revenue neutral when adopted and for a specified period thereafter," it says. "If – and here there is scope for debate – motorists already pay their way, the greater efficiency arising from road pricing reform could be promoted as giving motorists more and better roads for a similar amount of money. It would also be fairer to only charge people for the roads they use."

The draft report recommends Canberra "actively encourage state and territory governments to undertake pilot studies on how vehicle telematics could be used for distance and location charging of cars and other light vehicles".

The government should offer to partly fund these pilot studies and ensure that motorists are consulted.

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The draft report warns that public-private partnership funding models often used for big infrastructure projects "are not a magic pudding". It says sometimes direct government borrowing and funding through debt can be more cost-effective.

"Australian governments have the capacity to fund higher levels of public infrastructure provision than provided for under current fiscal and debt management practices," it says. "Use of this capacity is justifiable for projects of demonstrable high net social benefit."